The Overhead Myth

The founders of the three largest charity watchdogs in the US have penned a letter and started a campaign to debunk the overhead myth. Between Dan Pallotta’s outstanding TED talk this year – with nearly 2 million views and counting – and this move by Art Taylor (BBB Wise Giving Alliance), Jacob Harold (GuideStar), and Ken Berger (Charity Navigator), we might just be at the beginning of the end of the tyranny of “low overheads = well-run charity.”

The letter, signed by all three organization’s CEOs, marks the beginning of a campaign to correct the common misconception that the percentage of charity’s expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is, on its own, an appropriate metric to evaluate when assessing a charity’s worthiness and efficiency. The nonprofit sector, which all three organizations provide information to and about, has too often erroneously focused on overhead over the past few decades, which has starved nonprofits from investing in themselves as enterprises and created what the Stanford Social Innovation Review calls, “The Nonprofit Starvation Cycle.”

I don’t yet know the details of the aforementioned campaign, but it’s high time we had one. My hope is that the campaign provides donors and funders rules that are as simple as the “low overhead” mantra has been, because we won’t debunk one simple, easy-to-follow orthodoxy unless we replace it with another.

The challenge, of course, is that solving big problems is hard, complex, and nuanced. Nevertheless, my bet is that the most successful version of this campaign will result in simple mantras and a few short checklists, as well as focused advocacy with the big foundations, institutional donors, and signatories of the Giving Pledge.

I’m excited to see this unfold, and to support the effort. As a start, here’s the full text of their letter, which you can endorse here.

To the Donors of America:

We write to correct a misconception about what matters when deciding which charity to support.

The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance.

We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance.

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management. In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance can do more damage than good.

In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, and others that proves the point.

So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don’t need low overhead, they need high performance.